Vol. 78, No. 2, February 2005

Legal Effect of Electronic Transactions

by Jeffrey J. Serum

Wisconsin's Uniform Electronic Transactions Act¹ (UETA) was signed by Gov. Doyle on April 20, 2004, and went into effect on May 5, 2004. Wisconsin is the 45th state to enact UETA. A procedural act, UETA provides that a contract, signature, or record may not be denied legal effect or enforceability solely because it is in electronic form.

Historical Background

By the mid 1990s, the development of electronic commerce was outpacing the development of laws to regulate electronic transactions. To help the law catch up to what already was happening in the business world, the National Conference of Commissioners on Uniform State Laws (NCCUSL) set out to develop a uniform act to establish a framework for the use of electronic signatures, records, and communications in contractual transactions. In July 1999, the NCCUSL approved UETA and recommended it for enactment in all states.

Around the same time, developments also were taking place at the federal level. In June 2000, President Clinton signed into law the Electronic Signatures in Global and National Commerce Act (E-SIGN),² which went into effect on Oct. 1, 2000.

E-SIGN provides that neither contracts nor signatures should be denied legal effect solely because they are electronic in form.³ Recognizing that contract law is usually a matter of state law, Congress included a reverse preemption clause allowing a state's law to supersede E-SIGN if the state adopts UETA in its official NCCUSL version.⁴ Until the Wisconsin Legislature adopted UETA, E-SIGN was the primary legislation governing electronic commerce in Wisconsin.

Wisconsin's version of UETA does not significantly change the substantive provisions of the NCCUSL version and also is consistent with E-SIGN. Therefore, Wisconsin's version of UETA now governs electronic transactions, signatures, and records in Wisconsin. Although UETA and E-SIGN are similar in nature, important differences do exist. One key difference involves consumer disclosure and consent. Unlike E-SIGN, UETA does not include provisions geared specifically toward consumers. However, Wisconsin's version of UETA states that the consumer protection provisions of E-SIGN will still govern transactions covered by UETA.⁵ Thus, businesses must comply with the E-SIGN consumer protection requirements even though E-SIGN is now otherwise preempted in Wisconsin.

The E-SIGN consumer protection provisions allow the use of electronic records in consumer transactions only if the consumer affirmatively consents and does not withdraw such consent.⁶ Before consenting, the consumer must be provided with a "clear and conspicuous statement" informing the consumer of various matters including the right to withdraw consent and any rights to receive a record in paper form.⁷ Consumers must be given a statement of the software and hardware requirements necessary to access and retain the electronic records.⁸ Additionally, consumers must either electronically consent, or electronically confirm their consent, in a manner that "reasonably demonstrates" that they can access information in the particular electronic form that will be used to provide the information that is the subject of the consent.⁹

Applicability of UETA

UETA applies to electronic records and electronic signatures relating to a transaction.¹⁰ For UETA to apply, each party to a transaction must agree to conduct transactions by electronic means.¹¹ E-SIGN, on the other hand, states only that a party may not be required to use or accept electronic signatures or electronic records.¹² Thus, while E-SIGN implies that there must be an agreement to conduct transactions electronically, the requirement is not explicitly stated as in UETA.

Whether the parties have agreed to conduct a transaction by electronic means is to be determined from the context and surrounding circumstances, including the parties' behavior.¹³ A party who agrees to conduct one transaction by electronic means may refuse to conduct other transactions electronically.¹⁴ For example, a party is free to insist that future business be conducted with paper after initially agreeing to conduct business electronically.

In many circumstances, the parties to an electronic transaction may vary the provisions of UETA by agreement.¹⁵ However, not all UETA provisions may be varied by the parties. For example, a party's right to refuse to conduct subsequent transactions electronically may not be waived. E-SIGN, on the other hand, does not permit parties to vary its terms.

UETA does not apply to any transactions governed by 1) laws governing the execution of wills or the creation of testamentary trusts or 2) the Wisconsin Uniform Commercial Code (except for Wis. Stat. chapters 402 and 411 governing sales and leases and certain provisions of Wis. Stat. chapter 401).¹⁶ However, since many transactions are sales and leases, UETA applies to a significant amount of commerce in Wisconsin.

UETA also does not govern the following records or any transaction evidenced by them: 1) records governed by any law relating to adoption, divorce, or other family law matters; 2) court notices; 3) court orders; or 4) official court documents including briefs, pleadings, and other writings requiring execution in connection with court proceedings.¹⁷ UETA also does not apply to certain laws requiring that notice be given of 1) the termination or cancellation of utility services; 2) default, acceleration, repossession, foreclosure, or eviction, or the right to cure, under a credit agreement secured by, or a rental agreement for, a primary residence of any individual; 3) termination or cancellation of health insurance or benefits or life insurance benefits, excluding annuities; 4) product recalls or material product failures that risk endangering health or safety; and 5) any laws requiring a document to accompany any transportation or handling of hazardous materials, pesticides, or other toxic or dangerous materials.¹⁸

Basic Provisions

UETA defines several media-neutral terms that are used as alternatives to the word "writing." For example, a "record" is information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.¹⁹ An "electronic record" is a record that is created, generated, sent, communicated, received, or stored by electronic means.²⁰ Examples of electronic records include emails and scanned or digital images of documents.

Other definitions ensure that the law is broad enough to cover a variety of electronic transactions. For example, an "electronic signature" is an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with intent to sign the record.²¹ The reporter's notes to the official version of UETA suggest that a determination of whether an electronic signature exists should be made in light of all surrounding circumstances. Examples of electronic signatures may include a person's name affixed to an email, the entering of an ATM code, or clicking the "I Agree" button on a vendor's Web site.

The key concept of UETA is that a record or signature will not be denied legal effect or enforceability solely because it is in electronic form.²² Likewise, a contract will not be denied legal effect or enforceability solely because an electronic record was used in its formation.²³ Unless otherwise excepted from UETA, a law requiring a record to be in writing can be satisfied by an electronic record.²⁴ Similarly, a law requiring a signature is satisfied by an electronic signature.²⁵ If a law requires a signature to be notarized, the requirement is satisfied if the electronic signature of the person authorized to perform the notary act, together with all other information required by law, is attached to or logically associated with the signature of record.²⁶

Electronic Agents and Automated Transactions

UETA recognizes the fact that many transactions are entered into by people interacting with computers. For example, when we order goods from a vendor's Web site, we are entering into a contract with the vendor's computer system. The computer program processing the order is an "electronic agent" of the vendor. UETA defines an electronic agent as "a computer program or an electronic or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part, without review or action by an individual."²⁷ UETA provides that the transaction processed by the vendor's electronic agent is legally binding on both the vendor and the consumer if the consumer knows or has reason to know that his or her actions will cause the electronic agent to complete the transaction.²⁸

Today, many contracts are entered into between computer systems without any human interaction at all. For example, a grocery store inventory system may detect a low inventory of butter. The inventory system will automatically submit an order for more butter to the local dairy. The dairy's computer system will receive the order, and the dairy's automated packaging system will place the ordered butter on the dairy's loading dock for delivery. An automated loading system will then place the butter on a delivery truck. In this example, a transaction occurred without any human interaction between the grocery store and dairy. This is known as an "automated transaction," which UETA recognizes as a contract having legal effect.²⁹ UETA defines an automated transaction as "a transaction conducted or performed, in whole or in part, by electronic means or by the use of electronic records, in which the acts or records of one or both parties are not reviewed by an individual in the ordinary course of forming a contract, performing under an existing contract, or fulfilling an obligation required by the transaction."³⁰

Errors and Security

As with all transactions, electronic transactions are susceptible to mistakes and errors. UETA provides rules for determining the effect of such errors. If the parties agree to use a security procedure to detect unintended changes or errors, and one party does not comply with the security procedure, the complying party may avoid the effect of the error or change to the electronic record.³¹ If an automated transaction involves an individual on one side and an electronic agent on the other, the individual may avoid the effect of an erroneous electronic record if two requirements are met. First, the electronic agent must not have provided an opportunity to prevent or correct the error. Second, when the individual learned of the error, the individual 1) promptly notified the other party;

2) took reasonable steps to return or destroy any consideration received; and 3) did not use or receive any benefit or value from the received consideration.³²

If neither of the above rules apply, the legal effect of any changes or errors will be determined by the parties' contract or by other applicable laws, including the law of mistake.³³ While the UETA procedures for avoiding the effect of certain erroneous transactions do not apply to all possible mistakes and errors involving electronic transactions, they do provide some guidance that is lacking under E-SIGN. Unfortunately, neither UETA nor E-SIGN address important security issues such as forgery, hacking, and other forms of fraud. Parties must attempt to protect themselves from these potential abuses by requiring the use of security procedures including, but not limited to, password encryption, algorithms, and time and date stamps.

Time of Sending and Receiving an Electronic Document

UETA clarifies when an electronic document is deemed sent or received. Unless otherwise agreed to by the parties, an electronic record is sent when it 1) is properly addressed to an information processing system designated by the recipient, 2) is in a form capable of being processed by that system, and 3) enters an information processing system outside the control of the sender or of a person acting on behalf of the sender or enters a region of the information processing system that is under the recipient's control.³⁴ For example, an email is considered sent once a person clicks the "send" button.

Except when the parties otherwise agree, an electronic record is received when it 1) enters an information processing system that the recipient has designated and 2) is in a form capable of being processed by that system.³⁵ Once these requirements are met, an electronic record is presumed to have been received. For example, an email does not have to be opened by the recipient in order for receipt to be effective. This UETA provision is somewhat analogous to the mailbox rule of contract law that provides that a document is deemed to be sent and received once it is placed in the mail for delivery.

Jurisdictional Guidance

E-SIGN provides little guidance as to where an electronic transaction occurs for jurisdictional purposes. Fortunately, UETA takes some of the guesswork out of this issue. Unless otherwise expressly agreed to by the parties, an electronic record is deemed to be sent from the sender's place of business and to be received at the recipient's place of business.³⁶ If a party does not have a place of business, such party's place of residence will be considered the place of receipt or sending, as applicable.³⁷

Retention of Electronic Records

UETA offers a more flexible approach to record retention than does E-SIGN. Under UETA, if a law requires the retention of a record, this requirement is satisfied by retaining an electronic record. The electronic record must accurately reflect the information set forth in the original record and remain accessible for later reference.³⁸ If the UETA record-retention requirements are satisfied, retaining a written record is no longer necessary. A party may use the services of a third party to comply with the UETA record-retention requirements.³⁹ E-SIGN does not address the issue of third-party record maintenance.

Transferable Electronic Records

UETA defines a "transferable record" as an electronic record that would be a negotiable note under Wis. Stat. chapter 403 or a negotiable record under Wis. Stat. chapter 407 if it were in writing.⁴⁰ The issuer of the electronic record must expressly agree that such record is transferable for the record to be considered transferable.⁴¹ While E-SIGN has an "electronic negotiable instrument" provision, it only applies to promissory notes secured by real property that the note issuer expressly agrees to be governed by E-SIGN.⁴² Thus, UETA applies to a significant number of negotiable notes and documents that are not subject to E-SIGN.

The UETA transferable records provisions are a departure from UETA's general procedural nature. Any person having control of a transferable record is the holder, as that term is defined by the Wisconsin Uniform Commercial Code (UCC), and has the same rights and defenses as a holder of an equivalent record or writing under the UCC, including any applicable rights and defenses of a holder in due course, a holder to which a negotiable record has been negotiated, or a purchaser.⁴³ UETA further provides that delivery, possession, and endorsement are not required to obtain or exercise any rights under UETA.⁴⁴

The Future of Electronic Commerce: Paperless Closings

The UETA transferable records provisions were drafted to permit industries - such as the real estate mortgage industry - to undertake pilot projects involving electronic notes while revisions to UCC articles 3, 4, and 4A were contemplated.⁴⁵ In fact, five Wisconsin counties have already begun to electronically process mortgage satisfactions.⁴⁶

In its pilot project, the Racine County register of deeds office was able to process an electronic mortgage satisfaction in 45 seconds, compared to the 11 minutes required to process a paper satisfaction.⁴⁷ The register of deeds office envisions that electronic mortgages and conveyances will become reality in the near future.⁴⁸ It is likely that both the real estate and the financial industries will be strong proponents of electronic mortgages and conveyances due to the significant time and money savings that electronic commerce promises.

As industries attempt to expand the scope of electronic commerce, laws will need to be adapted to keep up. For example, while paperless real estate closings could save a tremendous amount of time and money, the legal system must be capable of giving legal effect to such closings. Fortunately, new laws are being developed to help the legal system cope with industry demands to go paperless.

For example, in 2002, the Uniform Law Commission began work on the Uniform Real Property Electronic Recordation Act (URPERA) to harmonize local recording laws. URPERA will help remove any doubts that existed under prior law regarding the recordability of electronic documents containing electronic signatures. URPERA permits, but does not require, local filing offices to create electronic recording systems.⁴⁹ Like UETA, URPERA recognizes electronic signatures, electronic verification of documents, and the general validity of electronic documents. Paper documents could still be used, but a recording office would be allowed to convert them to electronic form.⁵⁰ In essence, URPERA will provide a framework to help state and local governments develop electronic recording systems. As laws such as URPERA are adopted by state legislatures, the financial and real estate industries will develop increased confidence in the use of electronic documents.

The Effect of UETA on the Practitioner

As a predominately procedural statute, UETA makes very few changes to Wisconsin substantive law. In situations in which there is no applicable signature or writing requirement, UETA will not even apply. However, if there is a legal signature or writing requirement, UETA provides that an electronic signature or writing will satisfy such requirement. Of course, all other requirements of contract law still must be satisfied to give an electronic transaction legal effect.

Practitioners will need to understand the true scope of UETA. For example, practitioners who understand UETA's limitations will realize the importance of advising clients to protect electronic communications of highly confidential information by contractually requiring the use of reliable systems, encryption, and other security devices. Such protections could provide clients with a right to damages if the other party fails to comply with its contractual security requirements. Under UETA, it is important to understand that if the parties do not otherwise agree, there is no penalty for the failure to use security devices in transmitting information in electronic transactions.

Practitioners should advise business clients engaged in electronic commerce to remain in compliance with the

E-SIGN consumer protection requirements. For example, a business may not provide required documents or disclosures to a consumer electronically unless the consumer consents. Wisconsin's version of UETA does not preempt these consumer protections, and there can be significant penalties for noncompliance.

It is important to consider UETA's practical initial effect. UETA applies only if both parties agree to contract electronically. Many people may be wary of conducting transactions electronically. It will take time for clients to become comfortable entering into significant transactions without paper writings or hand signatures. However, in our rapidly-developing economy, use of electronic transactions will surely increase; and it will probably happen sooner rather than later.

Conclusion

The adoption of UETA provides Wisconsin with an electronic commerce law consistent with the laws of most other states and with E-SIGN. Because UETA is generally more comprehensive than E-SIGN, it will provide businesses and individuals with greater confidence that electronic transactions have legal effect. This, in turn, should help to continue the development of electronic commerce in Wisconsin and throughout the world.

Today, it is commonly accepted that an Internet click-through process creates a legally binding contract. In the relatively near future, a Wisconsin resident may be able to close on the sale or purchase of a property in Florida with a few clicks of a mouse. It will be the responsibility of practitioners to ensure that these transactions are structured to comply with the law and thereby have legal effect.

Endnotes

¹2003 Wisconsin Act 294.

²15 U.S.C. §§ 7001-7031 (2000).

³15 U.S.C. § 7001(a)(1)-(2).

⁴15 U.S.C. § 7002(a)(1).

⁵Wis. Stat. § 137.12(2p).

⁶15 U.S.C. § 7001(c)(1)(A).

⁷15 U.S.C. § 7001(c)(1)(B).

⁸15 U.S.C. § 7001(c)(1)(C).

⁹See id.

¹⁰Wis. Stat. § 137.12(1).

¹¹Wis. Stat. § 137.13(2).

¹²15 U.S.C. § 7001(b)(2).

¹³Wis. Stat. § 137.13(2).

¹⁴Wis. Stat. § 137.13(3).

¹⁵Wis. Stat. § 137.13(4).

¹⁶Wis. Stat. § 137.12(2). The provisions of chapter 401 that are subject to UETA include Wis. Stat. sections 401.107 (waivers) and 401.206 (statute of frauds).

¹⁷Wis. Stat. § 137.12(2m).

¹⁸Wis. Stat. § 137.12(2r).

¹⁹Wis. Stat. § 137.11(12).

²⁰Wis. Stat. § 137.11(7).

²¹Wis. Stat. § 137.11(8).

²²Wis. Stat. § 137.15(1).

²³Wis. Stat. § 137.15(2).

²⁴Wis. Stat. § 137.15(3).

²⁵Wis. Stat. § 137.15(4).

²⁶Wis. Stat. § 137.19.

²⁷Wis. Stat. § 137.11(6).

²⁸Wis. Stat. § 137.22(2).

²⁹Wis. Stat. § 137.22(1).

³⁰Wis. Stat. § 137.11(2).

³¹Wis. Stat. § 137.18(1)(a).

³²Wis. Stat. § 137.18(1)(b).

³³Wis. Stat. § 137.18(2).

³⁴Wis. Stat. § 137.23(1).

³⁵Wis. Stat. § 137.23(2).

³⁶Wis. Stat. § 137.23(4).

³⁷Wis. Stat. § 137.23(4)(b).

³⁸Wis. Stat. § 137.20(1).

³⁹Wis. Stat. § 137.20(3).

⁴⁰Wis. Stat. § 137.24(1).

⁴¹Wis. Stat. § 137.24(1m).

⁴²15 U.S.C. § 7021.

⁴³Wis. Stat. § 137.24(4).

⁴⁴See id.

⁴⁵Jane K. Winn et al., Law of Electronic Commerce § 5.05(G) (4th ed. 2002).

⁴⁶Michele Derus, Please Sign on the Virtual Line, Milw. J. Sentinel, Jan. 11, 2004, at 1F.

⁴⁷Id.

⁴⁸Id.

⁴⁹URPERA § 3(a) (March 2004 draft).

⁵⁰URPERA § 4.

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